Market Know-How: Currency Pluralism

Instead, they introduce their own exchange rates of c.c.u., or conventional currency units (traditionally based on dollar or euro rates) or set prices in Russian rubles. The market is unlikely to restore the universal currency unit, the role of which was played by the “greenback”. To get to know the particulars of that multitude of currencies and figure out where renting space is cheaper, a tenant today cannot do without a calculator and a fresh exchange rate report.

In late May, the State Duma (lower house of Russian parliament) gave tentative approval to the draft law that would ban setting prices of goods and services in foreign currency and using all sorts of conventional currency units. Violators will face fines. Whether those measures are reasonable is quite another matter. But lawmakers’ desire to boost the standing of the national currency this time has fully coincided with the situation on the St. Petersburg office property market. Property management companies and owners of office properties use the impending legislation as additional argument in talks with their tenants.

Ruble on the Offensive

In 2Q of 2006 yet another group of local business centers abandoned the use of US dollar. Meanwhile, the euro has so far failed to secure a strong foothold on the office real estate market. But then, more and more landlords tend to put trust in the national currency. GVA Sawyer has reported that in May 2006 18 percent of complexes introduced ruble-denominated rental rates. In late 2005 only 13 percent of office centers adhered to such a policy.

Economy class offices are not the only ones to move into the ruble zones. Complexes of higher quality, rated as B and B+ class, including those who work with international tenants, are following their example. One of those is the City Center at 18 Petrogradskaya Embankment – the city’s largest class B+ property, providing 25,000sqm of offices and developed public amenities. Nowadays, offices at City Center are valued at 12,600 to 16,200 rubles per 1sqm per year, including VAT and service costs.

One of the oldest business centers in the city, Neptune, too, has switched from the c.c.u. set at own discretion to national currency. Inform-Future on Tambovskaya Street gave up euros for rubles. “The behavior of the European currency is hardly predictable. We switched to it in late 2003 when the (ruble-euro exchange) rate was nearly as high as 37 rubles. Today, it stands at approximately 34 rubles. The annual 5 percent increase in rental rates is being offset only by decreasing currency rate, but not by increasing maintenance costs. Beginning 2006 we have been fixing the minimum rate of exchange in our tenancy agreements. The euro has never gone above that rate. In fact, thus we have switched to the ruble,” Inform-Future’s deputy general director Helve Zaikina explains.

Property management companies report that tenants, including international companies, calmly respond to the transition to the ruble. At least, no one has so far rejected a tenancy on those grounds. The above-mentioned complexes have occupancy rates of 100 percent, plus would be tenants on waiting lists.

All the business centers run by GK Best company (four properties, providing 15,000sqm of class C and B+ office space) now set rents in rubles. Rents range from 7,000 to 10,500 rubles per 1sqm per year. “Rental rates under all new tenancies signed at Midel, Resurs, Taims and Granat (business centers) are set in rubles. Previously signed agreements whereby rents were set in c.c.u. remain valid. However, their extension implies transition to the ruble,” says Vadim Demeshenkov, head of office real estate at Best Commercial Property.

“The ruble today may as well be viewed as a hard currency. Denominating rates in rubles is much more convenient also for the purposes of accounting. Where a business center charges a tenant on the basis of one rate and several days the tenant pays the amount calculated with another rate, there is a mess,” explains Boris Zhurkov, property manager at T4 and Evrika business centers. Those two properties providing a total of 33,000sqm of offices in Nevsky District switched to the ruble last year.

Rental rates at the class A business center Langenzipen on the Kamennoostrovsky Island (Petrogradskaya Storona district), too, are denominated in rubles. The office complex provides a total of 11,800sqm of space and comprises two buildings. The project belongs to Teorema management company that had acquired the property formerly owned by the Znamya Truda factory (Langenzipen Plant) – an 19th century architectural monument and an unfinished Soviet-era development. The redbrick factory building underwent redevelopment, and another building has been transformed into a stylish property designed by Sergei Choban. The building’s fa?ade is covered with 3D glazing with internal illumination and features digital images of Greek-Roman motifs. Offices in the glazed building are let at the base rate of 18,000 per 1sqm; the rate at the redbrick building is set at 12,600 per 1sqm. Baltinvestbank has already signed a tenancy deal for nearly 2,900sqm of office space in the new building.

Several other class A business centers gave up the dollar in 2Q 2006. Atrium and Belyye Nochi (White Nights) business centers have switched to the rate based on simple average of dollar and euro rates. Class A centers still remaining loyal to the dollar are Sweden House and Stroganovsky business center – a recently built complex at 19 Nevsky. Admittedly, the rental rate set by Storganovsky is quite high for St. Petersburg – approximately $845 per 1sqm per year (Becar is the exclusive broker for the project).

Most office properties – nearly 50%, according to GVA Sawyer – are using all sorts of conventional currency units, set at rates between 29 and 40 rubles. Many apply the so-called KUGI rate (35 rubles), set by the St. Petersburg state property management committee for tenants of municipally-owned properties.

Alexei Fyodorov, head of office real estate at the company Praktis, reports that in the first 6 months of this year 60 percent of class B office centers denominated their rates in currency units, not pegged to the dollar, or to the euro. In the class C sector the share of such properties is 48 percent.

“In fact, when applying a fixed c.c.u. rate, we are charging our tenants in rubles. That is why, once the formal transition to the ruble takes place the clients will not have any problems. However, we are not in a hurry to abandon c.c.u. completely. Psychologically, using such rates is easier than dealing with multi-digit numbers,” holds Yelena Nikulicheva, general director at AiBi Management. The company’s portfolio comprises five buildings rates as class B and C, providing nearly 25,500sqm of office space.

Managers at many business centers – Yelizavetinsky, 30 Nevsky, Moskovsky, Farvater, VMB Trust’s properties – plan the transition to the ruble by the end of this year. At the same time, many others are set to remain loyal to their own currencies, the dollar or the euro, taking measures to secure themselves against a further decrease in exchange rates. GVA Saywer’s analysts report that landlords and management companies seek to increase or stabilize their earnings but at the same time are reluctant to give up the extras they earn when the dollar or the euro exchange rates grow versus the ruble.

“We minimize risks and prefer using the currency basket,” says Yelena Cherevko, deputy board chairman at BCM Group. “The business centers run by our company have tenancies with rates set in euros, dollars, conventional units and rubles. We also have to take our tenants’ wishes into account. Foreigners plan their business operations in their national currencies.”

Retailers Opt for “Euro-Dollars”

The retail property market, too, operates with all types of currencies. Shopping centers raised at the expense of foreign investors denominate their rates chiefly in euros. For example, the retail and entertainment center Piter Raduga to be launched in Moskovsky District in December has set rates at 450 to 900 euros per 1sqm per year. The developer of the project is Vinci Construction Grands Projets. Tenancies at the 85,000-square-meters are brokered by Astera-Oncore realty consulting company.

Nevsky Plaza, under development next to Corinthia Nevsky Palace, to be finalized in late 2007, offers space to boutique operators at 1,300 to 2,200 euros per 1sqm per year. The investor is the Maltese group Corinthia, that owns the 5-star hotel. Some of the shopping centers operating in the city remain loyal to the dollar. For example, boutiques at the Grand Palace shopping arcade are let at $920 to $1,800 per 1sqm per year. Long-term tenancies envisage annual adjustment of payments by 5 percent, but say nothing of transition to another type of currency.

Vladimirsky Passazh at 19 Vladimirsky Prospekt lets space at the average rate of $1,200 per 1sqm, where the minimum dollar rate is set at 29 rubles. At the River House retail and office complex that figure stands at 28.5 rubles. “Dollar-denominated rates are quite common. However, the slump in US currency rate has forced practically all landlords to introduce into their deals a reserve clause setting the minimum rate of dollar at 27.5 to 30 rubles,” says Yuri Borisov, managing partner at AiBi Group. The group’s track record includes six completed retail projects, where the company acted as the author of concept and an exclusive agent. The group also rus Rumba, Yuzhny Polyus and Galereya 1814 complexes.

“After all, the retail real estate market differs greatly from that of office properties. The tenant deliberately chooses a specific property, pays considerable amounts of money for the fit-out and counts on long-term relations with the landlord. All details are thoroughly discussed during negotiations. Rental rates are adjusted annually by 2 to 5%,” Borisov says. “The most common formula today is the simple average between euro and dollar rates (referred to as “euro-dollar”). The price situation is quite stable. So far we have seen no deals set in rubles.”

For example, the newly built Shkipersky Mall denominates payments in “euro-dollars”. The first stage of the complex was launched this spring on the Vassilyevsky Island. Space there is let at 240 to 1,200 c.c.u. per 1sqm per year. The same approach is practiced by Gallery Apriori, to be launched by this fall at 56 Bolshoi Prospekt (Petrogradskaya Storona). Tenancies are brokered by Becar, at 1,000 to 2,000 c.c.u. per 1sqm per year. “The transition from one type of currency unit to another lacks any speculative component,” holds Vsevolod Glazunov, head of brokerage at Becar. “In doing so landlords seek to fix the level of income and secure themselves against possible currency fluctuations. For the time being, the market does not reject “euro-dollars” or c.c.u.”

Grand Canyon, one of the larges malls in the city launched by the company Solomon in late 2005, plans to switch to the ruble-denominated rates in the near future. “In the beginning we denominated rates in dollars using the Central Bank exchange rate of fixed amounts. Nowadays, we are gradually introducing the ruble-denominated rates. The majority of new tenancies use the Russian currency. We believe that such an approach is reasonable. Even more so as the government plans to ban the practice of using conventional currency,” says Irina Konyakhina, public relations director at Solomon.

“Pending adoption of the new law, the landlords do not seem to be worried about the use of c.c.u. All bills are issued in rubles and are paid by tenants through bank transfers. Hence, the transition to the domestic currency is not likely to cause any problems, save technical problems arising from signing contracts, etc.,” Yuri Borisov assumes.